NetLink NBN Trust - Maybank Kim Eng 2019-04-24: More Competition In A Small Segment


NetLink NBN Trust - More Competition In A Small Segment

Not a short-medium term worry. Maintain BUY.

  • SP Telecom’s more aggressive entry into the fibre broadband services for enterprise and government segment poses a potential risk for NETLINK NBN TRUST (NetLink, SGX:CJLU)’s non-residential revenues but this segment is only 8-12% of revenues and current contracts are long-term in nature. The impact could be higher for the integrated telco incumbents i.e. SINGTEL (SGX:Z74) and STARHUB (SGX:CC3).
  • We maintain our DDM based Target Price (COE 6%, LTG 0%) of SGD0.93 and our BUY.
  • Any change to its current regulated returns is the main risk to our outlook.

Dipping its toes even deeper

  • SP Telecom disclosed that it is building out a fibre network with "comprehensive coverage that can serve all government, wholesale and business customers in five years' time" and will be partly available in 1Q20.
  • It has an existing suite of cyber security options among the integrated solutions that it offers to the said segments so the fibre network is meant to enhance its portfolio. See The Straits Times report.

Clearing the air

  • We spoke with NetLink management and concur with their assessment that it is unlikely that SP or any other parties would find it economically viable to enter the residential fibre market where NetLink derives 61%- 62% of its FY18-FY21E revenues.
  • On the enterprise side, Netlink only provides access services to the end user or to telcos that bundle such access with their own suite of services (e.g. SingTel, StarHub, SP Telecom). We would also note that contracts involving enterprise and government are typically three to five years long and thus the impact of increased competition is likely to be felt in the medium term or longer.

Limited impact

  • Based on our sensitivity analysis, for every 5% change in non-residential revenues, our FY20/21E core profit forecasts would be impacted by 2%/2% and our DDM based Target Price by 1%.
  • We believe the benefits of increased residential fibre penetration from cable migration and a healthy dividend yield outweigh the risks.

Luis Hilado Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-04-24
SGX Stock Analyst Report BUY MAINTAIN BUY 0.930 SAME 0.930